Diesel Usage Less Good – Is the Economy Slipping?

Diesel use in the USA was less good year-over-year (YoY) in April 2011.  As the majority of goods are moved using diesel – diesel usage is one of the metrics Econintersect uses to gauge the economy.

Due to government data combining fuel oil with their statistics, Econintersect uses the unadjusted data provided by Ceridian-UCLA Pulse of Commerce Index™ (PCI).  The index is based on real-time fuel consumption data for over the road trucking collected by Ceridian.

The Ceridian-UCLA Pulse of Commerce Index™ (PCI) fell 0.5 percent on a seasonally and workday adjusted basis in April, marking a continuation of the see-saw economic performance experienced over the past twelve months.

Though down in April, the decline offset only a fraction of the exceptional 2.7 percent gain posted in March, which was sufficient to drive continued growth in the three month moving average of the PCI.

This reinforces our cautious, below consensus outlook for GDP growth. The disappointing 1.8 percent growth of real GDP in the first quarter was consistent with the pattern of modest, fitful reflected by the PCI since the middle of 2010. The April PCI release is more of the same — a three month moving average that calls for further growth in GDP, but at a modest rate in the 2-3 percent range, not the 5-6 percent range that is necessary to drive meaningful improvement in unemployment. Absent acceleration in PCI, we continue to expect monthly employment gains to remain rangebound between 150,000 and 200,000 new jobs.

Year over year growth in April was again positive, up 3.5 percent. This was the 17th straight month of year over year improvement in the index and a clear indication that the economic recovery continues. This is particularly encouraging because the index was up against a strong prior year comparison of plus 6.5 percent on a year-over-year basis in April of 2010. From an absolute standpoint, GDP remains ahead of the previous peak reached in Q4 07. But the PCI and Industrial production are still about 5 percent below their previous peaks — meaning that the goods producing component of GDP is still well below its previous high.

The Federal Reserve’s estimate of industrial production for the month of April will be released on May 17. The PCI indicates industrial production will show an increase of 0.25% when it is reported at that time. This represents a markdown from last month’s forecasts because of the weakness in the April PCI.

Ceridian-UCLA also tries to correlate diesel usage to the economy, however Econintersect uses several other pulse points in building its economic forecasts (analysis here).

The YoY improvement was a small 1.28%.  This is the lowest YoY increase since 2009.  Definitely, the YoY growth of diesel for trucking is trending less good, i.e. the growth in diesel usage is slowing (decelerating).  The first derivative (velocity) is still positive.  The second derivative (acceleration) is negative.

The question is whether other factors are causing this decline.  The first place to look is the cost of diesel.

Here is the view of Edward Leamer, Chief Economist of the Ceridian-UCLA Pulse of
Commerce Index and Director of the UCLA Anderson Forecast:

The headwind of a very substantial rise in diesel fuel prices continues unabated. In the last month the average cost per gallon elevated from $3.80 in March to $3.96 in May, compared with $2.04 in March 2009. Though this rise in fuel costs encourages greater fuel efficiencies, we have not found any evidence that the variability in fuel efficiencies affects the movement of the PCI over the short run. The more likely channel through which higher costs of diesel and other refined products affect diesel volumes is by slowing the rate of growth of demand. This would be especially worrisome if the economy were late in the expansion and had built up major imbalances that need correction, but early in an expansion with hugely stimulative monetary policy, inflation seems the greater worry
than a large drop in growth. Still higher crude oil prices inevitably will suck some of the vigor out of the economy.

Econintersect suggests that using its railroad traffic analysis, that a tipping point has been reached on use of railroads versus trucking – particularly railroad intermodal transport which is up 9% YoY in April 2011.  All intermodal movements could be either on rail or by truck.  The diesel increases could be simply making on road trucking uncompetitive.

This is the danger in using only one economic pulse point to gauge the economy.

Related Articles:

Railroads: April 2011 Is Less Good by Steven Hansen

Counting Things: March Container Counts Continue to Show Improving Economy by Steven Hansen

Trucking Tonnage Increases in March 2011 by GEI News